Key Takeaways
- The unlimited marital deduction only applies if the surviving spouse is a US citizen
- Direct transfer to a non-US spouse triggers immediate estate tax
- A Qualified Domestic Trust (QDOT) qualifies for marital deduction — deferring the tax
- The surviving spouse receives all income from the trust without immediate estate tax
The Problem
On the death of a US citizen/domicile, all assets can be transferred to the surviving US spouse without immediate estate tax — the unlimited marital deduction. But this benefit requires the spouse to be a US citizen. Direct transfer to a surviving non-US spouse triggers immediate estate tax at up to 40%.
The QDOT Solution
Establish a trust that qualifies as a Qualified Domestic Trust. The US spouse transfers assets to the trust with the surviving non-US spouse as beneficiary. This qualifies for the marital deduction — no immediate estate tax. The surviving spouse receives all income from the trust without estate tax, though distribution of principal triggers estate tax.
Practical Example
Without planning on a $20 million estate, the tax bill is $2 million immediately. With a QDOT, the transfer qualifies for the unlimited marital deduction — no immediate tax. The surviving spouse receives income for life while planning for the eventual estate tax obligation.